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How Lululemon Crushed It in 2018

Four earnings reports, and four blockbuster sales and profit performances by the yoga apparel specialist.

It's no stretch to say that lululemon athletica (NASDAQ:LULU) knocked it out of the park in 2018. Surging sales growth and spiking profitability helped shares rise more than 50% even as the S&P 500 sank 6%. Stock returns had approached 100%, in fact, before broader market volatility took them lower in the year's final months.

But that slump had nothing to do with Lululemon's many 2018 operating wins, which look set to continue into the new fiscal year. Let's take a closer look.

Image source: Getty Images.

Reaching back

Investors had high hopes for the yoga apparel specialist's business last year, but Lululemon outpaced those expectations at each turn. Sales growth was 18% in the holiday quarter to comfortably top the upgraded targets that executives had issued in early January. That result came with a hefty increase in gross profit margin, which implied that the chain's pricing power was strengthening with help from its latest clothing releases.

Lululemon followed that result with a blockbuster first-quarter announcement that showed growth accelerating to 19%. Most of the gains came from its surging e-commerce segment, but there was also robust customer traffic growth in its physical locations. Across those selling channels, more shoppers became buyers, and they paid premium prices for its products as gross margin leapt up to 53% of sales.

The retailer's final report of calendar 2018 contained no signs of a slowdown, either. Instead, sales jumped 21% and profitability took another step closer to the record high Lululemon set in 2012. And importantly, the chain is getting a higher proportion of its sales from the digital channel, which is lifting rather than lowering its overall profitability.

Looking ahead

Some of the best news could be yet to come. CFO Patrick Guido said in December that, despite the fact that gross profit margin is up 7 percentage points since 2015, investors could see a few more years of improvements in this core metric. New product releases should help, but Lululemon also has room to cut supply-chain costs as it gains scale.

Its top-line results for the peak shopping season should be stellar. Management in mid-January raised its forecast for comparable-store sales growth to the mid-to-high-teens percentage range, versus the forecast in December, which was in the high single digits to low double digits. "The momentum in our business remained strong throughout the holiday season, reflecting the ongoing success of our product offerings," CEO Calvin McDonald told investors.

That success means Lululemon will have easily surpassed its growth and earnings targets in each of the last four quarterly reports. The chain is on track to cross $3 billion of annual revenue this year and is well positioned to reach management's medium-term goal of $4 billion by 2020.

From there, its biggest growth avenues appear to be international expansion and a push into new product niches and a wider demographic that includes more men. Recent wins in areas like outerwear suggest the brand could translate well into other segments, and there are far more yoga and exercise fans outside of Lululemon's current geographic focus in the United States and Canada.

And while a market downturn or quality-control challenges could always threaten its rally, all those positive points could help make 2019 another year of outperformance for the business and the stock.